Understanding the relationship between margin and markup helps beverage alcohol suppliers with strategic planning for their brands. It can help with various initiatives like your spirits marketing strategy, increasing sales volume, taxes, and product distribution strategy. By calculating margin and markup, you can find areas to improve your long- and short-term goals to penetrate the market with a retail marketing strategy that reaches more customers.
Margin vs Markup Defined
What is margin?
Profit margin is the revenue a company makes after paying the Cost of Goods Sold (COGS.) What makes profit margin different from gross profit, however, is how the number is displayed. Accountants display gross profit as a monetary value, and margin as a percentage of revenue.
It might be easier if we break it down as an example. Tequila X sells a product for $100, and it costs $80 to produce this product. Its gross profit is $20, but its profit margin is 20%. To arrive at this figure, you should subtract the cost of goods sold (COGS) from the revenue, and then divide that by the sales price. ($100-$80)/$100.
By calculating the profit margin, you can compare different products in a more standardized way. This might be helpful if you have high- and low-ticket items. It may seem like your high-ticket item is very profitable by looking at gross profit, but the profit margin could also reveal the lower-priced item to have value.
How do you calculate margin?
(revenue-cost)/price = margin
What is markup?
Markup is the difference between the company’s selling price from the item’s cost. This matters because the higher the marking on a product, the higher the revenue. Just like the margin, the figure is given as a percentage. The calculation is a little different than a simple subtraction problem. In this case, gross profit is divided by cost to get the markup percentage.
Using our previous example, the gross profit of our $100 tequila product is $20 after subtracting $80 of expenses. The markup percentage is shown as a percentage of costs rather than a percentage of revenue. So when you divide the $20 gross profit by the $80 cost, the markup percentage would be 25%.
How do you calculate markup?
(revenue-cost)/cost = markup
What is the difference between margin and markup?
When analyzing gross margin vs markup, it may become apparent that they work hand in hand. Profit margin and markup give us two different views of the same transaction. Profit margin relates profit to sales price or revenue. But markup represents profit as it relates to costs.
Understanding profit margin and markup will help ensure price setting is just right. If the price is too low, you can lose profits, and you will see sales drop if it is too high.
Example of Margin and Markup
To help with understanding, we can look at how margin and markup are used together to price alcohol.
In this sample scenario, you are an alcohol supplier trying to determine how to price your vodka based on your desired profit margins. We know the cost of the vodka is $20, and you want to earn a 40% profit margin in the off-premise retail locations where your product is being sold. To set your price properly, you will need to calculate the markup.
First, you will want to take your 40% margin and express that as a decimal: 100-40 = 60 or 0.6%. Then divide your cost ($20) by the 0.6%, which will amount to $33.33. This is the retail price you should sell your vodka for if the COGS is $20 and your desired margin is 40%. So your markup percentage will be the gross profit ($13.33) divided by the cost ($20), which equals 0.66%.
Margin vs Markup Chart
Margin and markup have a predictable relationship with one another. If you know the margin for a product, then there is a way to predict markup. (And vice versa is also true for this as well.) We’ve included a margin vs markup table below for easy reference:
What is a good gross margin for alcohol sales?
Alcohol is one of the fastest-growing CPG products. Gross margin for alcohol sales can help alcohol suppliers determine the profitability of their products.
Gross Margin for Alcohol Suppliers
Gross Margin for Bars
There is a range of 75-85% gross margin for on-premise sales in bars. In general, more expensive drinks generally have lower margins. Profit margins in bars will also vary based on product type:
- Liquor: 80-85%
- Bottled beer: 75%
- Wine: 60-70%
What is the markup for off-premise alcohol sales?
ABC or State Stores
Some states operate monopolies in the retail industry, and the state government or the ABC (Alcoholic Beverage Commission) set prices. This practice leads to uniform prices throughout the state. Generally, the markup is 25-45%.
Privately Owned Liquor Stores
In states that have liquor stores that set their prices, stores can see a markup of liquor prices ranging from 25-50%. But you will see more variability based on factors like local retail conditions, local competition, and in-store promotions.
Using Overproof in tandem with your margin and markup goals
When you assess your profit margin and markup alongside distributor depletion reports, you can steer your pricing strategy in the right direction. The Overproof Portal helps alcohol brands build strategies on actionable insights. These include:
- Brand strategies based on industry-based insights
- Translation to local markets
- KPIs and goals set for your team
- Activity and execution in the field
- Performance reports updated in real-time
- Data that helps you make better-informed decisions
FAQs
What is margin?
Profit margin is the revenue a company makes after paying costs. You calculate profit margin with the formula: (revenue-cost)/price = margin. Then you give the gross margin as a percent.
What is markup?
Markup is the difference between the company’s selling price from the item’s cost. The formula for markup is: (revenue-cost)/cost = markup. You display the figure for markup as a percent.
What is the margin vs markup formula?
The margin formula is revenue minus cost divided by price, while the markup formula is revenue minus cost divided by markup. Both of these formula results should be displayed as a percent.
What is the difference between margin and markup?
Profit margin and markup show two aspects of the same transaction. Profit margin relates profit to sales price or revenue. Markup represents profit as it relates to costs.
What is revenue?
Revenue is the money earned by a company when they sell a product or service.
What is the cost of goods sold (COGS)?
COGS refers to the expenses that the product or service incur when creating it.
What is gross profit?
Gross profit is the money left over after expenses have been subtracted from total revenue.
How can I find out more about cost-volume-profit analysis for my alcohol brand?
You can find out more by reading our article on cost-volume-profit analysis.
How can I learn more about Overproof?
Overproof builds business success with the only AI-driven planning, execution, and tracking platform for alcohol brands. We’d love to talk more about how we can help your business. Fill out the form on the right to learn more.
